GBP/CAD Rate Rallies on Soft Canadian Inflation Print

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The Canadian Dollar was sold after Canadian inflation data printed softer than expected and raised the odds of a June rate cut at the bank of Canada.

The Pound to Canadian Dollar exchange rate (GBP/CAD) rose a third of a per cent to 1.7220 in the minutes after Statistics Canada said CPI inflation rose 2.9% on a year-over-year basis in March following a 0.6% month-on-month gain that exceeded expectations for a rise of 0.7%.

"The Bank of Canada said that it was looking for more evidence of downward momentum, and that is exactly what it got with today’s report. Admittedly the headline measure has inched up slightly here, but the market has seen through the effects of the oil price surge, and the broad-based softening in the core measures gives policymakers exactly what they need to justify imminent rate cuts," says Kyle Chapman, FX Markets Analyst at Ballinger Group.

"Financial markets had been thinking there was a 50/50 chance of a June cut before today's data, but that probability rose to around 65% following the benign March CPI data release. That saw bond yields and the Canadian dollar fall," says Andrew Grantham, an economist at CIBC.

The rise in global oil prices boosted the headline inflation figure, and it will be the undershoot in the core measures of inflation that triggered the CAD selloff: the median CPI measure read at 2.8% y/y, down from 3.0% and below expectations for a repeat 3.0% print. The trimmed mean read at 3.1%, which was below expectations for a repeat of February's 3.2%.

"All the evidence is falling into place that dialling down policy restrictiveness is the right step to take to pull demand out of a trough, and this should mean that the BoC becomes the next central bank to detach from the Fed," says Chapman. "All of this puts the Canadian dollar in a perilous position. It is already at a four-month low and is rapidly heading towards a four-year low on the current trajectory after U.S. inflation burst USD/CAD out of its tight ranges."

Above: GBP/CAD at daily intervals showing a break above the 23.6% Fibonacci retracement of the 2024 rally. Track GBP/CAD with your own custom rate alerts. Set Up Here 

Olivia Cross, North America Economist at Capital Economics, says the March inflation data fit the trend of downward momentum in core inflation seen so far this year.

"The Bank will probably want to see the same again in the April CPI data, which will be released before the Bank’s next meeting, although a modest pick-up in the average monthly gain seems unlikely to prevent a cut in June," she says.

The Bank of Canada is particularly concerned with developments in the trim and median measures of core inflation, which are now both tracking below 1.5% on a 3-month annualised basis. This annualised measure is useful in identifying more timely trends in core inflation, and Governor Macklem will be relieved to see there has been no reacceleration, as is the case in the United States.

"The Bank of Canada stated last week that it was looking for downward momentum in core inflation measures to be sustained before starting to cut interest rates. Today's data meets that requirement, although there is one more CPI print to come before the Bank's next policy decision. We continue to expect a first cut at that June meeting," says Andrew Grantham, an economist at CIBC.